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Europe Set to Extend Rescue Fund

Casting aside their differences over how to contain the continuing debt crisis, Europe’s leaders on Thursday pledged to do “whatever is required” to defend their embattled currency.

They also agreed to create a permanent support fund for the euro after 2013 — something they hope will be a first step to calming the markets.

But even as they moved to restore investor confidence, the seriousness of the euro’s plight was underlined by events in beleaguered countries. Spain paid a sharply higher interest rate on an auction of long-term bonds than in its previous sale, reflecting investor fears about the country’s indebted economy.

And Greece, already the beneficiary of a rescue led by the European Union, was hit by another strike Thursday over austerity plans and received a warning from Moody’s Investors Service of a potential downgrade in ratings on its local and foreign currency government debt.

The developments lent some urgency to the two-day meeting in Brussels of leaders of the union’s 27 nations.

“We are ready to do everything that is necessary to ensure the financial stability of the euro area,” José Manuel Barroso, president of the European Commission, said late Thursday at a news briefing.

A draft declaration that was to be incorporated in the final meeting communiqué said that European leaders would ensure “the availability of adequate financial support” through their existing bailout fund of 440 billion euros ($589 billion), a hint that they may be prepared to increase it if necessary.

With a bailout of Ireland recently completed, and concern that contagion will spread to Portugal and perhaps Spain, leaders have been divided on whether to increase the size of the fund, or to allow money from it to be used to buy government debt.

They also are far from agreement on longer-term financial issues, like whether to create common bonds backed by the entire euro zone.

Herman Van Rompuy, president of the European Council, said that the leaders had not discussed increasing the value of the fund or making it more flexible, but had agreed more generally that they would “do whatever is required to ensure the stability of the euro.”

Leaders did agree on the creation of a bailout mechanism that would operate after 2013, when the mandate of the current 440-billion-euro fund expires.

Yet even here, vital questions on the size and scope of the fund were left until the spring.

For the first time, bondholders could be asked to shoulder some losses in future debt crises on a case-by-case basis, a measure that euro zone countries supported when they met several weeks ago to approve the bailout of Ireland and seek ways to support troubled economies in the future.

To set up this facility, the European Union will have to revise its governing treaty, but it plans to do so in such a way as to avoid requiring referendums in any of the 27 member countries, all of which will have to ratify the revision.

Photo

Chancellor Angela Merkel of Germany talking with George Papandreou, prime minister of Greece, in Brussels on Thursday.Credit
Yves Herman/Reuters

At the meeting Thursday, Germany and Britain agreed to compromises on the future rescue fund. The German government modified its efforts to win a clear declaration that the fund would be used only as a last resort.

Britain, which has not adopted the euro, accepted assurances that it would not be required to take part in any future euro zone bailout funds set up by the European Union under a catch-all clause intended to deal with emergencies.

But big divisions loom over the bloc’s response to the current financial crisis, which has already forced Greece and Ireland to seek aid from the European Union and the International Monetary Fund.

Chancellor Angela Merkel of Germany has rejected calls to create common bonds for the euro zone, while Jean-Claude Juncker of Luxembourg, who heads the group of 16 euro zone finance ministers and supports the common bonds, has said he hopes to bring the subject up for discussion at the meeting.

On Thursday, however, Mr. Juncker sought to play down the differences between European countries, an apparent recognition that parading their divisions would only accentuate market anxiety.

“There are no divergences between the member nations of the euro group or between Mrs. Merkel and me,” Mr. Juncker said on InfoRadio Berlin-Brandenburg, according to Bloomberg News. “I am very much in favor that we succeed in combining solidity with solidarity.”

Mrs. Merkel, too, tried to calm tensions. “Jean-Claude Juncker and I had a long telephone conversation and cleared up the issue a while ago,” she said in an interview published Thursday in the German newspaper Bild. “With so much at stake, the emotions sometimes get involved.”

One issue that had threatened to overshadow the meeting disappeared Thursday when the European Central Bank said it had decided to nearly double its capital reserves.

Meanwhile, austerity measures meant to win back market confidence have led to angry protests in several countries. In Greece, public transport workers walked off their jobs Thursday to protest pay cuts, a day after a one-day general strike turned violent.

The government in Madrid announced a new round of privatizations and other measures last week to reduce its budget deficit, but as the bond sale Thursday showed, Madrid is still struggling to persuade investors that it will meet its goals.

The Spanish Treasury sold 2.4 billion euros ($3.2 billion) of 10-year and 15-year bonds — less than the 3 billion euros it had aimed for — at rates substantially above what it paid at recent auctions. It sold 1.78 billion euros of 10-year debt at an average yield of 5.45 percent, up from the 4.62 percent it paid to issue similar securities in November, and it sold 618.7 million euros of 15-year bonds at 5.95 percent, compared with 4.54 percent in October.

A day earlier, Moody’s warned of a possible downgrade of Spain’s Aa1 long-term debt rating, a high investment grade, citing concerns that the country might have difficulty rolling over its loans.